Dialogue April-June, 2010, Volume 11 No. 4
China and the Global Energy
Oil has kept the global economies running, as the whole industrialization process has been dependent on the resource. Oil accounts for a larger share in the global energy mix, however, factors like declining reserves, high finding costs, unstable and risky regions and promotion of clean fuel has encouraged the use of natural gas on a large scale. A few geologically favorable regions have abundant supplies of these resources namely, Eurasia, Africa and notably the Middle East. With huge potential, these regions have become a symbol of international energy trade. This article intends to look into the energy consumption and the global energy geopolitics.
India and China have become net importers of oil. In the process the two have entered into acquiring energy assets, as a policy of enhancing energy security. However, the Chinese have managed to clinch most of these deals. The article argues that China has been successful in making its presence felt in many oil producing countries across globe. However, its strategy in forming these deals is under scrutiny. The article further assesses the Chinese strategy and energy stakes in the world energy market.
Today, oil has become a global commodity, which is the basic necessity for the global economies to expand. The Gulf (GCC), Europe and Eurasia and Africa have huge potential in terms of energy reserves. To give some estimates, “Europe and Eurasia has the second largest proven reserves of hydrocarbons, with 142.2 (‘000) mb and 62.89 tcm; while, Africa has the third largest proven reserves, which stands at 125.6 (‘000) mb and 14.65 tcm; and the Middle East has 754.1 (‘000) mb and 75.91 tcm at the end of 2008"1, the largest in the world.
The global consumers seek to achieve energy security, defined in terms of its reliability, sufficiency and affordability. In the mid 20th century, the seven sisters dominated the world oil market and, controlled the real functioning of these markets. The seven sisters configured the oil market forces until the formation of OPEC. It was the time, when the producers realized the significance of their valuable and non-renewable resource. This led to the shift of power to OPEC in 70’s in terms of taking control of their domestic oil companies and acquired a major say in the oil pricing in world markets. This also saw the beginning of new contracts that facilitated the producers more than the consumers. Simultaneously, the rise of non – OPEC producers like Russia, also raised the competition for the OPEC. The geopolitics of energy is further configured by the new players in the market. Today, the oil market has new consumers from Asia, specifically China. This has increased the intensity of competition on the global front. The inevitable scramble for energy has made the global consumers to build friendly ties with their closest neighbouring producers and unstable regions of the world. Consumer energy stakes across the globe has also been perceived as a possible militarization in energy rich countries. Apart from this, denial protest from the local people and environment has also been major issues of debate. Hence, the energy geopolitics has moved to a new level. Implications of this scramble could be the worst for some players, particularly Asia. This will depend upon, how the growing Asia makes the best possible use of its technological expertise and co-operate to reap the benefits2.
Asian Dependency Syndrome
The increasing demand and the threats perceived by various stake holders has made many of these economies vulnerable. The west for instance, has the resources in terms of finance and infrastructure to import the energy (hydrocarbon) resources from any part of the globe, unlike Asia. But, as the global demand rises, the west and Asia alike, are facing the dilemma. Oil has been the very basis of human development and growth. On a regular basis, the world finds itself intensely dependent on the resource and the reliability of these sources (the Gulf, Africa, etc.). Decreasing domestic production and soaring oil prices have given them a dependency syndrome. In addition, the domestic demand of the producers has also increased. Thus, a huge share of these reserves will travel within the region, for instance, the Dolphin gas project (2007) will carry natural gas from Qatar to the UAE and Oman.
Asia’s dependence on oil imports and over – reliance over some sources, have made energy security a concern for many Asian states. Diversification of source is one of the fundamental policies of the importing countries. Apparently, be it any source the Middle East, Central Asia or Africa, Asians are dependent on energy imports, bearing in mind the fact that, the largest reserves of oil is in the Middle East, which have been reliable suppliers. The whims and fancies of the west has been much tolerated by the Middle Eastern producers, for instance launching sanctions and embargoes against the countries. This is one reason, why there was a shift in the foreign policy of these producer countries and they started to ‘Look to East’, as they saw an emerging market in Asia. In Asia, India and China are the fastest growing economies and will be the most competitive markets alongside the west. "... World’s is primary energy demand is projected to increase by 1.5 per cent per year between 2007 and 2030, from just over 12,000 million tones of oil equivalent (Mtoe) to 16,800 Mtoe – an overall increase of 40 per cent”3. Much of the demand is coming from China which “….. overtakes the United States soon after 2025 to become the world’s biggest spender on oil and gas imports (in monetary terms) while India’s spending on oil and gas imports surpasses that of Japan soon after 2020 to become the world’s third – largest importer”4. A major chunk of this demand will be consumed by the growing transportation sector.
Some of the Asian players are oil and gas producers as well. However, political and geographical constraints has made the imports difficult, resulting in heavy imports from other regions. For instance, “….. Japan, China, India and South Korea becoming leading gas importers, and ….. Indonesia, Malaysia and Australia comprising the main net exporters …..”5. Eventually, the economies have been dominated by the oil imports and energy has been brought into the foreign policy domain. US has been a major importer of oil, but EU countries lead the world oil imports as a group. Oil consumption is growing rapidly in Asia, than any other region. The growing middle class and the rising living standards of the people is linked to more imported fuel. The ever - expanding population, increase in the number of cars and trucks and overall the expectations of people which is growth and prosperity, all of this can only spur more oil imports. While coal is the most used fuel, strong environmental concerns have compelled the governments to switch over to oil and most recently natural gas. The consumption of natural gas is expected to grow rapidly in the coming years, in the form of LNG, particularly from Asia. Countries like India, China and Korea have moved from oil to the use of gas in the transportation sector, which is considered as the major applicant of CO2 emissions leading to climate change. The “….. gas demand growth led by India and China will see regional net imports rise 65 per cent – from 91 bcm in 2007 to 176 bcm in 2012 – the strongest growth globally. Indeed, Asia has evolved into the hottest market for LNG globally, and we forecast in the 2008 Asia Gas & LNG Report that the region’s total gas import bill is set to reach US $ 64.9 bn by 2012"6. Asia will need oil and gas imports from overseas sources, specifically the Middle East. Under these circumstances, Asia remains vulnerable to the social unrest in the region, leadership issues, secure supplies and piracy. But, the most important of all, as referred earlier, is the slow militarization in these areas for these resources.
In the meanwhile policies such as, developing domestic resources; initiating joint ventures with the private sector to develop indigenous resources; pursuing overseas equity assets; diversification of sources; promoting a consumer – producer dialogue; develop energy resources within Asia with a regional cooperation (for instance, on 24th June 1986, Association of South-East Asian Nations (ASEAN) signed the ASEAN ‘Petroleum Security Agreement7’ (APSA), where the oil producers should increase their exports, as and when the member countries sense the shortage; should be followed. Asia like the west is expected to follow an incremental pattern of energy imports to sustain their growth. As addicted to oil and gas, they will eventually develop the alternative energies. However before this happens, the world is dependent on hydrocarbons. Apparently, how far Asia manages to reduce these vulnerabilities and minimizes its dependency on foreign oil is a matter of investigation and conjecture.
China’s Energy Strategy
Growing economy and rapid urbanization have given boost to the increased consumption of oil and gas in China. From exporter to a net importer of oil, China’s transition to a globalized economy demonstrates the swift and the efficient operational culture. “China has set an arduous goal for itself by 2020 to build a xiaokang shehui, or “well-off” society and to further social and economic development, improve living conditions, promote environmental protection and balanced resource use”8. China’s energy strategy is a complexity of hydrocarbon constraints and environment friendly energies. “At present, China’s environment is at a critical stage; the ecological balance is fragile and total carbon emissions are far beyond its environmental capacity. Desertification continues to spread throughout China as air quality worsens. The 2001 World Bank Development Report listed the 20 most seriously polluted cities, 16 of which were in China. The losses induced by air pollution in China already account for 3 – 7 per cent of GDP. In 2020, the economic losses will be alarming with estimated losses as high as 13 per cent”9.
China’s energy consumption is dominated by coal, closely followed by oil and gas. “Of all sectors, transportation is growing fastest in terms of energy consumption, ….. by 2020, transportation will consume over 25 per cent of China’s total energy”10. “China’s oil demand doubled from 1.7 to 3.4 million bpd between 1985 and 1995. It doubled again, reaching 6.8 million bpd by 2005, ….. The US Department of Energy expects that China’s imported oil will climb to 9.4 million bpd by 2025, ….. As for China, while 94 per cent of its overall energy supply came from domestic resources in 2005, this is projected to be near 80 per cent in 2020"11. “China’s total oil production reached 4.0 bbl/d in 2008, similar to production in 2007….. Daqing field produced about 801,000 bbl/d of crude oil in 2008, ….. Shengli oil field produced about 553,000 bbl/d of crude oil during 2008, …..”12. China’s oil production and consumption can be seen in figure 1.
China’s oil production and consumption (1990 – 2010)13
Source: Energy Information Administration (July 2009), “China”, Country Analysis Brief, p. 4.
“China is the third largest consumer of oil in the world, with 3.9 mb/d; while US (11.0 mb/d) and Japan (4.6 mb/d) are at first and second positions respectively. Other important consumers are Germany (2.4 mb/d); South Korea (2.1 mb/d); India (2.1 mb/d); France (1.9 mb/d); Spain (1.5 mb/d); Italy (1.5 mb/d); Taiwan (0.9 mb/d); and importing about 430 MMcf/d in 2008”14. For natural gas, “only imports will be able to meet the growing gas demand, which will be estimated to account for 40 per cent of China’s total gas needs by 2025"15. However, China has substantial amount of coal reserves and considering oil and gas limitations, China is depending on coal. Accordingly, by 2030, coal is expected to provide 62 per cent, oil 18 per cent, natural gas 8 per cent, hydropower 9 per cent, and nuclear power 3 per cent of China’s energy consumption16. Given the challenges put forth by fossil fuels, “….. China has created the State Energy Leading Group, led by Premier Wen Jiabao. Its major tasks include research on China’s energy strategy, key energy development and saving policies, energy security and external cooperation. The Chinese government has also established a team to draft the Energy Law, which will formulate long-term energy strategy, regulating all the aspects of China’s energy exploration, production, consumption, and international cooperation. The Energy Law will be conducive to building a conservation-oriented and environment-friendly economy by optimizing energy structures and implementing clean production”17.
Chinese energy strategy is mainly to use the domestic reserves. According to China’s Eleventh Five-Year Plan (2006-2010), China will try to meet its energy demand mainly with domestic supplies, as mentioned, utilizing coal (proven reserves, more than 114.5 billion tons) as the main source of energy18. Xinjiang preserves about 20.9 billion tons of oil and 10.85 trillion cubic meters of natural gas, respectively, accounting for 25.5 per cent and 27.9 per cent of China’s total onshore oil and natural gas reserves19. In order to achieve energy efficiency by 2050, “coal consumption cannot exceed 35 per cent of China’s energy consumption, with oil and natural gas accounting for 40-50 per cent and primary energy sources—such as nuclear, hydroelectric, solar, and wind power—accounting for 15-20 per cent”20. Apparently, “China’s per capita energy consumption will reach 1.5 tons in 2020-2030 and a total energy consumption of 2.25 billion tons of oil”21.
Developing alternative energies is also one of the policies of China. China is rich in uranium resources. “Although the Daya Bay nuclear power plant was imported, with Chinese engineers taking part in the construction and management, ….. The 300,000-kilowatt Qin Shan Phase I nuclear power plant was designed by Chinese engineers and built from 95 percent homemade equipment. Similarly, the Qin Shan Phase II plant is a pressurized water reactor that would use some imported technology, but China now has the capability to design and build small- to medium-sized pressurized water reactors”22. Similarly, China has also found substitute in Biofuels, which can be used for transportation and machinery. “….. the Chinese government plans to substitute biofuels for 2 million tons of petroleum by 2010 and 10 million tons by 2020”23. “Over the next 15 years, China is set to spend about $ 180 billion to increase its share of renewable energy to 15 per cent, from the current 7 per cent. China also plans to expand the coverage of solar heaters to 300 million cubic meters by 2020, replacing the use of about 40 million tons of standard coal each year”24. China’s policy for renewable energy is in the growing phase. The goal of the Renewable Energy Development and Utilization Promotion Law is to meet the short - term energy needs and to have a sustainable growth. The law also aims to secure human health and protect environment, lessening the impact of climate change. The crux of the law is to provide energy to the rural areas.
Apart from the boost given to the domestic production, China’s energy strategy is also to have a secure access to overseas resources. “Between 1980 and 2004, China’s aggregate energy consumption grew by 166 per cent, ….. and per – capita GDP rose from $ 172 (2000 RMB) in 1980, to $ 1161 in 2004. While shares of hydropower, nuclear, and natural gas have grown, coal remains China’s dominant source of energy”25. China has, “adopted a 20 per cent reduction in National Energy Intensity by 2010; implemented energy efficiency programmes, the program was on target for its first year, and is on track to reach its five-year goal in 2010; put China’s energy conservation law into effect”26; “starting from January (2009), the consumption tax on gasoline ….. increased from 0.2 yuan to 1 yuan per liter and the tax on diesel will rise from 0.1 yuan to 0.8 yuan per liter, …..”27; in renewable energy, “China set two wind power goals in 2005 — 5 GW by 2010 and 30 GW by 2020 and produced 44 per cent of the global supply of solar photovoltaic (PV) panels in 2008 up from 35 per cent in 2007, and 20 per cent in 2006. China already accounts for 70 per cent of both global production and use of solar hot water heating systems”28. Thus, China has diversified its energy consumption.
Given the robust economic growth and the improvement in the lives of the people, particularly the middle class, energy demand is expected to rise in the years to come. Thus, China’s reliance on foreign oil cannot be negated. China is set to develop alternative energies, such as, clean coal, nuclear, solar and hydro, this will reduce its dependence on overseas oil and gas. Energy security has become an integral component of the Chinese foreign policy. Eventually, it has built bilateral relations with many of the resource – rich states in the vicinity, at times forming deals with convict states. Apparently, the quest of securing these resources and its supplies has shaped new basis for co-operation.
China and the Global Energy
Economic development largely depends on the global energy market. To acquire these resources, energy companies from around the world have been competing and plunging into a scramble scenario. Energy is a finite resource and countries across the world share the same market. Hence, it is inevitable for a conflicting situation to arise. Given the circumstances, China has been tapping oil and gas resources across the world. It has also signed many co-operation agreements with many international players. China has signed co-operation agreements with Russia in the upstream and downstream sector and also in the area of developing renewable energies. China’s “CNPC signed an oil – for - loans agreement with Russian companies Rosneft and Transneft for $ 25 million and $ 15 million, respectively, in early 2009 that entails China financing the 43 - mile pipeline spur to run from ESPO to the Chinese border in exchange for crude oil deliveries”29. China – Caspian relations mainly talks of the gas pipeline from the region to China. “China inaugurated its first transnational oil pipeline in May 2006 when it began receiving Kazakh and Russian oil from a pipeline originating in Kazakhstan. The new 200,000 bbl/d pipeline spans 620 miles, connecting Atasu in northern Kazakhstan with Alashankou on the Chinese border in Xinjiang”30. Iran’s strategically favorable location has gained it a significant position in China’s energy policy. Many Chinese companies are operating in the country.
The Middle East resources have long been exhausted, thereby increasing the competition level. This has brought other regions to the forefront, viz., Central Asia and Africa. China currently imports a quarter of its hydrocarbon requirement from the African continent. Countries like Sudan, Angola and Nigeria have been a major source of China’s oil. “….. China imported 3.6 million bbl/d of crude oil in 2008, of which approximately 1.8 million bbl/d (50 per cent) came from the Middle East, 1.1 million bbl/d (30 per cent) from Africa, 101,000 bbl/d (3 per cent) from the Asia-Pacific region, and 603,000 bbl/d (17 per cent) came from other countries”31 (see graph 2). In 2008, Saudi Arabia and Angola were China’s two largest sources of oil imports, together accounting for over one-third of China’s total crude oil imports32. Chinese refineries were built for light and sweet crude. However, it has expanded its refining capacity for heavy and sour crudes as well. “China had 6.4 million bbl/d of crude oil refining capacity at 53 facilities as of January 2009, ….. goal is to raise refining capacity to 8.8 million bbl/d by 2011. According to the BP Statistical Review of World Energy, refinery utilization inChina increased from 67 per cent in 1998 to 89 per cent in 2008”33.
China’s crude oil imports by source in ‘000 bbl/d (Jan – May 2009)34
Source: Energy Information Administration (July 2009), “China”, Country Analysis Brief, P. 6.
To acquire these assets, Chinese oil firms have branched out across the globe and have been pursuing aggressive policies. Apart from the huge cash power, China also brings its political clout on the table when it goes for bidding. China has been following ‘oil – for – loan’ deals with many of the oil – rich countries, particularly in Africa. These funds are to facilitate the Chinese companies to build schools, roads, hospitals, residences, and other infrastructure. In a way, China is following the traditional path of the west. China’s investment is most successful in Sudan. The Chinese investment comes with strong urge to get hold of these assets. The country has been successful in many of its projects, due to fact that its investment comes strictly on ‘no questions asked’ basis, i.e., no interference in the domestic affairs of the host country.
Apart from loans, China has also come into limelight for its policy of ‘oil – for – arms’ with some of the countries, particularly Sudan. According to reports, “….. Sudan has obtained 34 new fighter jets from China, and that the Sudan air force is equipped with $100 million worth of Shenyang fighter planes, including a dozen supersonic F-7 jets. China has also provided military training in Equatorial Guinea and Chinese specialists in heavy military equipment have been sent to the country, ….. in exchange for oil”35. It is feared that, these arms and ammunitions were used in Darfur. For which, “the Sudanese president, Omar al-Bashir, has been charged with war crimes over the conflict in Darfur, becoming the first sitting head of state issued with an arrest warrant by the international criminal court (ICC). Prosecutors had alleged Bashir tried to wipe out three non - Arab ethnic groups”36. However, the investment made by China has also assisted the African nations to develop. The Chinese loans helped the African states in building roads, hospitals, educational institutions, etc., thus bringing Africa on the roadmap of development. This investment in the form of loans at a very low rate of interest has acted as a good – will for the oil projects.
China have signed many co-operation agreements with other consumers. India and China have joined hands in their search for energy resources. The two Asian giants have realized that, growing competition will only lead to rivalry and high asset prices. Hence, the two have signed MoUs in the energy sector. The Indo – China co-operation in the Middle East, Caspian region and Africa is significant, for instance, Iran, Syria and Sudan. Major consumers like the US and the EU have taken the entry of new players a threat, as China’s oil pursuits might collide with the US interests. Factors such as, unstable social and political systems, insufficient infrastructure, critical transit routes, demand exceeding supply and price fluctuations have altered the prospects of a potential co-operation. However, these issues can be moderated by putting the alternative energies into use. This will further need collaboration between the governments in terms of R & D and finance. Even then, as these energies are developed on a large scale and brought into the market for commercial usage, till then, the world is dependent on oil and gas.
1 British Petroleum (June 2009), “BP Statistical Review of World Energy”, p. 6 & 22, Accessed 22nd April 2010, See, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2009_downloads/statistical_review_of_world_energy_full_report_2009.pdf
2 Ghoble, Vrushal (January– March 2010), “India’s Energy Security and the Asian Oil Resources: Prospects and Challenges”, Dialogue, 11 (3): 175.
3 International Energy Agency (IEA) “World Energy Outlook 2009”, Executive Summary, P. 4, Accessed 23rd April 2010, see, http://www.worldenergyoutlook.org/docs/weo2009/WEO2009_es_english.pdf
4 Ibid, p. 7.
5 “Asia Gas & LNG Report”, Accessed 29th April 2010, See, http://www.bharatbook.com/Market-Research-Reports/Asia-Gas-LNG-Report.html
7 See, http://www.aseansec.org/1416.htm
8 Shijin, Liu (15th– 17th November 2003), “China’s National Energy Strategy and Reform”, China Development Forum 2003, Background Reports, Development Research Center of the State Council, Diaoyutai State Guesthouse, Beijing, China, p. 1, Accessed 26th April 2010, See, http://www.efchina.org/csepupfiles/workshop/2006102695218824.5759991600517.pdf/Briefing_book_031115_EN.pdf
10 Ibid, p. 3.
11 Liu, Xuecheng (September 2006), “China’s Energy Security and Its Grand Strategy”, Policy Analysis Brief, P. 3, Accessed 26th April 2010, See, http://www.stanleyfoundation.org/publications/pab/pab06chinasenergy.pdf
12 Energy Information Administration (July 2009), “China”, Country Analysis Brief, p. 3 & 4, Accessed 28th April 2010, See, http://www.eia.doe.gov/emeu/cabs/China/pdf.pdf
13 Ibid, p. 4.
14 Ibid, p. 2 & 12.
15 Liu, Xuecheng (September 2006), “China’s Energy Security and Its Grand Strategy”, Policy Analysis Brief, P. 3, Accessed 26th April 2010, See,http://www.stanleyfoundation.org/publications/pab/pab06chinasenergy.pdf
16 Ibid, p. 4.
18 Ibid, p. 5.
20 Ibid, p. 6.
22 Ibid, p. 8.
24 Ibid, p. 9.
25 Aden, T. Nathaniel & Jonathan E. Sinton (April 2006), “Environmental Implications of Energy Policy in China”, Environmental Politics, 15 (2): 252, Accessed 27th April 2010, See, http://china.lbl.gov/sites/china.lbl.gov/files/Environmental_implications_of_energy_policy_in_China.pdf
26 “Energy and Climate Policy Action in China” WRI Fact Sheet, World Resource Institute, p. 1, Accessed 27th April 2010, See, http://pdf.wri.org/factsheets/factsheet_china_policy.pdf
27 Lifei, Zheng (2008-12-06), “Plan for fuel tax increase proposed”,
China Daily, Accessed 27th April 2010, See, http://www.chinadaily.com.cn/china/2008-12/06/content_7278204.htm
28 “Energy and Climate Policy Action in China” WRI Fact Sheet, World Resource Institute, p. 2, Accessed 27th April 2010, See, http://pdf.wri.org/factsheets/factsheet_china_policy.pdf
29 Energy Information Administration (July 2009), “China”, Country Analysis Brief, p. 7 & 8, Accessed 28th April 2010, See, http://www.eia.doe.gov/emeu/cabs/China/pdf.pdf
30 Ibid, p. 7.
31 Ibid, p. 6.
33 Ibid, p. 9.
35 Taylor, Ian (31st December 1969), “Beijing’s Arms and Oil Interests in Africa”, China Brief, 5 (21), Accessed 28th April 2010, See, http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=3899&tx_ttnews%5BbackPid%5D=195&no_cache=1
36 Rice, Xan (4th March 2009), “Sudanese president Bashir charged with Darfur war crimes”, Accessed 28th April 2010, See, http://www.guardian.co.uk/world/2009/mar/04/omar-bashir-sudan-president-arrest